Is Income Related to Gulf Oil Spill taxable?

June 30, 2010

On June 25, 2010 the Internal Revenue Service provided guidance to those individuals and businesses affected by the oil spill in the Gulf of Mexico. Here is a very brief overview of the current law.

The law requires that a taxpayer include in gross income payments the taxpayer receives for lost business income, lost wages, or lost profits. This income may also be taxable for self-employment tax. However, how the income is structured determines the taxability. Is it made by an employer or by any employer/employee obligation? Be prepared. Know whether or not you will be receiving a 1099 Misc or a W-2 at the end of the year.

Generally, payments the taxpayer receives for property damage or destruction in not included in gross income as long as the payments do not exceed the taxpayer’s adjusted basis in the damaged or destroyed property. Should there be a gain, the tax can be deferred if replacement property is purchased and later sold. If the payments are less (including insurance reimbursements) the taxpayer may have a deductible casualty loss.

However, gross income payments received for personal physical injuries or physical sickness (not emotional distress) is generally not taxable.

Every person has unique financial circumstances. Be sure you understand your tax obligation as it relates to payments from BP.


Should you convert your IRA to a Roth IRA

June 28, 2010

What’s New? Effective January 1, 2010 conversions from a traditional IRA to a Roth IRA are no longer limited to the taxpayers with a modified adjusted gross income of $100,000 or less. Married couples who file separately can have a conversion as well.

What are the tax consequences of converting? You may owe income taxes on all or a portion of the amount converted depending on whether or not you made deductible or nondeductible contributions from your traditional IRA. However, you may select to include the conversion on your 2010 tax return or split it equally between 2011 and 2012.

What are potential advantages? Distributions from a Roth IRA are tax-free if you are age 591/2 or older and have held the account at least five years. You are not required to take minimum distributions at age 70 1/2. Beneficiaries can receive the assets tax-free.

What are potential disadvantages? Tax bracket now versus tax bracket later. Younger than 59 1/2 could pay a 10% penalty.

Be sure to consult with your Financial Advisor and your Tax Professional as to how a conversion may benefit your personal situation.


Why you should hire a “Licensed” Tax Professional

June 15, 2010

 

U.S. tax law is an ever-changing set of rules and regulations with varying implications depending on the individual or business tax situation.  Regardless of tax law complexity, YOU as a taxpayer, are ultimately responsible for accurate reporting and payment of your tax obligation.  Things to consider in hiring a tax professional:

  • Did you know that only an Enrolled Agent, CPA or Attorney can represent you before the IRS ?  (these are all Federally or State licensed professionals)
  • Did you know that an unlicensed tax preparer has little or no regulatory requirements regarding ethics or education?
  • Did you know that self-prepared returns through tax software programs or online services do not protect you if there were errors due to incorrect input of information – intentional or not?
  • Would you know who to call if you receive ANY type of State or Federal tax notice?

Linda D. Smith is an Enrolled Agent & Licensed Tax Professional